ETFs neck and neck with pension index-tracking funds on cost

Exchange-traded funds are now a compelling proposition for long-term investors in the UK such as pension fund trustees, being just as cost effective as traditional index-tracking funds while offering better liquidity and a higher degree of transparency.

That was the finding of a research study conducted by diversified growth specialist Evercore Pan-Asset (EPA).

EPA’s fund research team studied the performance and costs of 223 European ETFs and the three leading ranges of index-tracking funds used by occupational pension funds in the UK and discovered that:

• ETFs were among the cheapest passive funds in terms of their tracking difference and trading costs
• The cheapest diversified portfolio of passive funds contains 58 per cent ETFs and 40 per cent index-tracking funds, and would have cost just 0.1 per cent in 2011
• Almost all passive funds performed better than their Total Expense Ratio implied in 2011

EPA discovered a significant disparity between the cost to investors of passive funds from different providers. A portfolio of funds managed by one leading index-tracking fund provider would have cost 0.59 per cent compared with 0.24 per cent for a portfolio of ETFs. And when taking account of the high degree of liquidity, transparency and the significantly wider range of asset classes available through ETFs, EPA’s investment committee had no doubt about the best way of accessing markets.

“We have always considered ETFs a great way of accessing markets, from UK Government bonds to Asian equities or commodities,” says John Redwood, chairman of the investment committee at EPA. “But it is reassuring that ETFs are competitive on cost even compared with the large scale index-tracking funds historically considered to be the best passive option for pension fund trustees. I hope our research can help trustees and their advisers to select the best ways of investing passively.”

EPA’s investment committee widely uses passive funds to implement their popular dynamic, diversified growth strategies, allowing clients to benefit from a portfolio that costs 2/3rds that of most competitor diversified growth funds. EPA prefers ETFs because they are typically the best and lowest cost trackers of indexes, can be traded almost instantly and offer the widest range of global equity, bond and alternative asset classes.

Out of the 13 portfolios considered for EPA’s White Paper, a portfolio solely containing ETFs is second cheapest in terms of its performance in 2011 and the trading costs incurred upon establishing the portfolio. The White Paper “Passive investing for pension trustees” uses the asset allocation of its flagship diversified growth strategy to compare the cost of a portfolio made up of the lowest cost ETFs with portfolios made up of the leading index-tracking fund ranges used by occupational pension trusts.